“Come to the dark side.” – Darth Vader

A long time ago, in a galaxy far, far away…but yet somehow in the future…there was, and is, F&T Financial Services (“F&T”). This idea is an illiquid gnat-cap and probably of no interest to the 2 & 20 crowd. However, it does present an interesting opportunity for those willing to enter the hypoactive trading space of companies not filing with the SEC, a.k.a. dark companies.

F&T is a bank that trades around 63% of tangible book value (TBV) and is profitable. It has 292K shares outstanding for a mere $19 million market capitalization. Management has focused on using earnings to repair the balance sheet, pay a nice dividend and buyback some shares. Oh, by the way, it also specializes in subprime auto loans, including marketing to non-resident Hispanic, immigrant farm workers. There is probably a support group out there for investors in subprime auto lenders that I should join, but not today.

Description: F&T is unusual because it is one of only nine state-chartered industrial banks in California. Industrial banks gained some notoriety in recent years because they are exempt from bank holding laws. Industrial banks are state-chartered but are overseen by the FDIC, which has raised some concerns as to how effective this arrangement is. The industrial bank charter allows large corporations, like Wal-Mart and GE, to have bank subsidiaries. The Dodd-Frank Act set a three-year moratorium on issuing new industrial bank charters while Congress debates who should, and how, regulate industrial banks. From an operational standpoint, industrial banks have more latitude in making consumer loans but are prohibited from offering demand deposit accounts, i.e., checking. F&T relies on savings accounts, certificates of deposits (CD’s) and money market accounts (MMA) to fund its operations.

The bank is located in the verdant San Joaquin Valley of southern California. There are five branches and they follow the Route 99 corridor.

F&T does not disclose what its average loan rate is but annualizing the quarterly interest income and dividing by the gross loan amount, the current yield is around 16.6%. California obviously caps consumer interest at levels that are not attractive to companies like Nicholas Financial but this is offset by the ability of the bank to use cheap deposits to leverage the balance sheet. Using the FFEIC data, I was able to piece together an operational history of the bank subsidiary:

Several things to note from the above data. One is that the bank was profitable even during the financial crisis. The other is that the bank has delevered a bit. The bank tends to be conservatively positioned, as its tangible equity to tangible assets is over 20%. A large part stems from subprime auto loans requiring more regulatory capital. While it looks over-capitalized compared to traditional banks, I would not expect any significant changes to its capital structure. The bank did buyback some stock starting in 4^th Qtr 2010 and bought back about 11K shares in 2011. There is no mention of this, or of the subsequent reissue, albeit a small amount of shares.

The holding company does have some goodwill and was related to the purchase of a collections agency about seven years ago. Given the nature of the lending, it made sense to have a unit focused on collections.

History: Unfortunately, the company has never filed any reports with the SEC and their financial reports are two pages per quarter, consisting of the balance sheet and the income statement. The annual report does provide more details but you have to be a shareholder to receive it. Posting the financials to investors is not a high priority. Despite the F&T web site providing an investor relations contact, I’d expect to receive a call from Chewbacca before getting a response from this IR.

Through various newspaper articles and state databases, I have been able to piece together a vague timeline of events. Finance And Thrift Company, Inc. was founded as Peoples Finance & Thrift Company of Porterville in 1925 and changed its name to Finance and Thrift Company, Inc. in 1965. It became FDIC insured in 1984. There were 22 branches at one point and there was a push in the early 2000’s to expand. The expansion included creating a Nevada holding corporation in 2001, creating a Hispanic lending company, opening a mortgage origination company and buying a collection agency in 2006. The expansion was orchestrated by the CEO, David Stuck.

In September 2007, a new CEO, Robert Hughes, was brought in from Ohio (more details on him in Management section). A number of changes have occurred under Hughes. In 2008, F&T elected two new members to the board, including its first Hispanic member, Gil Jaramillo. However, the Hispanic lending subsidiary has been dissolved. Branches have been reduced to five now. The loan portfolio shrank in 2008/2009 due to significant write-offs, rebounded in 2011 and has actually shrunk back a bit.

In November 2007, noted board member Edward “Ted” Cornell died. It appears that he was the chairman of the board. His obituary notes that he was born and raised in Porterville, went to Stanford, had a sizable cattle ranch and was a major benefactor of a community college, Porterville College. Another article noted that the city of Porterville was debating whether to buy a 3,400 acre tract of land from Ted Cornell, called Rocky Hill, to create a municipal park.

Another board member, and current chairman, is J. Less Guthrie, who is also chairman of the Federal Farm Credit Banks Funding Corporation:

J. Less Guthrie, chairman, owns and operates a cow/calf and stocker cattle ranch and a diversified farming operation in Porterville, California. He is a member of Farm Credit West, ACA and a member of the board of directors of U.S. AgBank, FCB. Mr. Guthrie serves on the boards of directors of Guthrie Investment Co., Inc., (farming and investments) and F&T Financial Services (consumer loans and debt collections). He also serves on the board of directors of the California Cattlemen’s Association (trade association). Mr. Guthrie also serves on the Funding Corporation Compensation Committee. Mr. Guthrie became a director in 2000 and his term expires in 2014.

My sense from reading about Cornell and Guthrie, plus having a link for obtaining an ITIN on the FTFS web site, is that the bank seems to serve workers in the agricultural industry, particularly those from outside the US (see, this is about aliens after all).

Another nifty factoid is that the bank has declared the 343^th consecutive quarterly dividends, an impressive span of 86 years. Here is the most recent annual dividend history:

The current quarterly dividend is $0.25/share that has been paid since November 2010. A special dividend of $0.25/share was paid in December 2012, which revives a tradition that stopped after 2006.

Management & Directors: Robert W. Hughes, 54 years old, was brought in as CEO in September 2007. He had previously led Ohio Central (OCFL), which has an interesting story. OCFL began as a federal credit union in 1949. Mr. Hughes joined the credit union as president and CEO in 1989. The primary focus was auto loans, which credit unions are sometimes known for doing. In 1998, it converted to a mutual savings society. It switched to being a non-stock mutual holding company (MHC) in September 2001 and became affiliated with TFS Financial, serving as its auto loan underwriter. Ohio Central was divested from TFS Financial in March 2005 via a stock conversion from mutual. (TFS Financial would itself convert to stock ownership in 2007.)

The treasurer/secretary/investor relations director of F&T is Diane Gregg, who is 45 years old. Her experience includes joining Ohio Central as vice president and chief operating officer in 1989, at the age of 22. I can only imagine that her talents were light years ahead to be hired for such a position. After Hughes left OCFL for F&T, Gregg became CEO of OCFL, which was sold to First Place Financial in July 2008. At that time, OCFL had two branches, $63 million in assets and equity of $6.0 million. She somehow managed to find a job at F&T.

The board consists of just six members. Mr. Guthrie, Jay Warnke and Paul Klippenstein have been longtime board members while Gil Jaramillo, John Richardson and Dr. Debra Hanks have all joined since 2007.

Information: Although banks tend to be black boxes even when reporting financials to the SEC, a dark bank is better than a dark company because it still has to report quarterly information, albeit for the bank subsidiary and not the bank holding company. Here is a useful web site:

https://cdr.ffiec.gov/public/ManageFacsimiles.aspx

The company’s web site includes several years of financials, although the posting is slow (only up to 2^nd Qtr2012), and brief director bios:

https://www.financeandthrift.com/

Here is a brief overview of the holding company financials:

You will note that 3^rd quarter tends to be the worst. In looking at the FFEIC data, this appears largely due to its collections agency business which tends to catch up in the 4^th quarter. I suspect that this stems from the vagaries of working in agriculture. TBV was $103.94 as of 6/30/2012 and might be $2-3 more by now.

The decline in the loan book since last September does not bother me. We do not know for certain why but seeing how other banks and lenders have seen tepid loan demand, it is better to see a shrinking loan book than a growing one that might be fueled by looser standards.

Risks: Lack of liquidity is a big risk. Investing in subprime auto loans to migrant farm workers. Dark.

This is a watching-paint-dry investment.